If you’re looking for companies that offer a useful income plus decent growth potential, then I believe the FTSE 250 mid-cap index is the best place to start.
Many of these medium-sized firms boast long and profitable trading histories, but are still expanding. Today I’m going to look at three dividend growth stocks from the FTSE 250 that I’ve been eyeballing for my own portfolio.
Smooth flying
Shares in engineering group Meggitt (LSE: MGGT) edged higher this morning after the firm reported underlying revenue growth of 9% for the first quarter. The firm’s business is split into three divisions, civil aerospace, defence and energy.
The largest of these is aerospace, which accounts for 54% of group revenue. The firm has operated in this sector for more than 80 years and says that “almost every jet airliner, regional aircraft and business jet in service” carries some of its equipment.
This dominant market share is a key attraction for me, especially as the firm’s defence business enjoys similar characteristics.
Although management warned today that air traffic growth could slow this year, it remains confident of delivering “strong revenue growth” with stable profit margins. The shares trade on about 15 times forecast earnings with a 3.4% dividend yield. That seems fair to me, given the group’s steady growth.
I suspect Meggitt will end up in the FTSE 100 in a few years. I see the shares as a long-term buy.
Recruitment success
Another FTSE 250 firm that’s impressed me recently is international recruitment group Hays (LSE: HAS). Its net fee income rose by 6% during the three months to 31 March, with like-for-like growth in all regions including the UK.
Chief executive Alistair Cox reported a “mixed economic backdrop across Europe” but said that the group’s main market of Germany grew by 6%. Elsewhere, Hays’ Australia and New Zealand business reported its 19th quarter of growth.
Although the future is uncertain, I think Hays’ size and geographical diversity should mean that it’s in a good position to cope with any regional slowdowns. In the meantime, profit margins are stable and cash generation remains very strong. Analysts expect earnings growth of 4%-6% per year in 2019 and 2020. With the shares offering a forecast yield of 4.6%, I think Hays remains worth buying.
A better buy than utilities?
Traditional utility stocks have been a poor investment in recent years. Several big names have cut their dividends and share price performance has been poor. The risk that utilities might be renationalised by a Labour government is also a concern.
If you’d like to invest in utilities but are looking for a safer choice, one company I’d consider is Telecom Plus (LSE: TEP), which trades under the Utility Warehouse brand. This business is a buying club that secures bulk-buy deals on energy, broadband and mobile which it resells to members.
Businesses of this kind aren’t always great investments. But Telecom Plus has been in business for more than 20 years and famously never advertises, relying on word-of-mouth and a network of agents. This approach has served the firm well. Sales have risen by 20% over the last five years. The group’s dividend has risen by 43% over the same period.
This business generates a lot of spare cash, most of which is returned to shareholders. The current dividend yield of 3.6% could be a good starting point. I’d buy.